Court cases pressure on financial reforms

Mountain of private debt in Wenzhou could reach 100 billion yuan despite efforts to clear up mess

A growing mountain of debt cases being brought before courts in Wenzhou, in Zhejiang province, is threatening to further derail ongoing financial reforms in the city.

According to the latest figures, last year Wenzhou's Intermediate People's Court and its High People's Court handled 19,511 cases related to private financing, involving some 22 billion yuan ($3.52 billion), while 5,393 cases related to disputes on financial lending agreements were settled, worth 24 billion yuan.

But officials suggests that if all the city's outstanding debt cases were taken into account, those financial totals could be doubled.

"Adding in the number of cases filed with local courts, and other ongoing disputes, the scale of private debt being left unpaid in the city is estimated at more than 100 billion yuan," said Xu Jianxin, head of the intermediate court.

Observers of the city's growing debt woes say the latest court data are another major hurdle for Wenzhou's much-publicized financial reforms, which have been aimed largely at bringing financial relief to its many thousands of cash-strapped businesses.

On Tuesday, officials claimed they took a significant step in that reform program, with the launch of a joint information platform between the city's various finance-related organizations and departments, and the Intermediate People's Court, which will be able to monitor and regulate illegal financial behavior.

Zhang Zhenyu, director of the city's financial office and the official in charge of the reforms, said: "We've been trying to accelerate these reforms after a lot of work last year, and are ready to launch more policies next month."

Zhang added that a draft plan for the regulation of Wenzhou's private financing system is being finalized by the provincial government.

Hit by a downturn in exports, increasing numbers of Wenzhou's factory owners have been under growing financial strain, with many taking the option of closing their businesses, leaving their debts unpaid.

The financial plan for the city centers on channeling private-sector funds - that were largely lodged with underground banks for high return - to properly regulated and supervised lending organizations.

In a bid to curb underground lending and match the needs of borrowers and lenders, the government has established Wenzhou's private lending registration service center, Wenzhou SME (small and medium-sized enterprise) Financing Service Center, a financial reform plaza and two financial development zones.

Xie Rongfang, executive president of Wenzhou Shoe and Leather Industry Association, said many of its member organizations - mainly small and medium-sized enterprises - had failed to obtain loans from banks after making losses last year, as orders dried up from overseas. Xie added that thousands of companies have been forced to close or halt production as a result.

Many suggest the city's financial reforms have had limited effect so far, and that all the government has managed to do is temporarily save some factories, which have been deemed too large to fall.

Huang Fajing, vice-president of Wenzhou General Chamber of Commerce, and owner of one of the world's largest lighter manufacturers, said: "It was unfair that the government offered instant assistance only to large-sized enterprises, which didn't really need it, while the majority of SMEs are still struggling without benefiting from any financial reforms directly."

Huang added that the reforms aimed at regulating the illegal underground financiers are unlikely to have any long-lasting effect.

Many local economists, such as Ma Jinlong, a former director of the Wenzhou government's economic research center, calls for the government to take a tougher approach, and allow any failing business to close.

"Clearing the decks and starting again with a new financial order would be a far better solution for enterprises," he said.